Story by The Globe and Mail
In an effort to buy Greece a few extra days to negotiate a new rescue deal it has been resisting for five months, the European Central Bank pumped more emergency funds into the nearly insolvent Greek banks as the European Commission warned the country that it faced an all-out crisis of its own making.
The decision to prop up the banks, and prevent the shattered Greek economy from shutting down, came Friday morning, the day after a meeting of the euro zone finance ministers in Luxembourg broke down, putting Greece dangerously close to default and exit from the euro zone.
The injection of liquidity into the Greek banks came as Greek Prime Minister Alexis Tsipras used an appearance at the St. Petersburg International Economic Forum (SPIEF) to insist that a deal could be reached on Monday, when the euro zone finance ministers meet yet again in a make-or-break session. Should that session, too, collapse, Greece will almost certainly default on an IMF payment worth almost €1.6-billion ($2.2-billion), due at the end of June.
Mr. Tsipras used his SPIEF speech, delivered immediately after the plenary session address given by Russian President Vladimir Putin, to plea for leniency from the European Union, the sponsor of the biggest portion of its bailout loans. “The European Union should go back to its initial principals of solidarity and social justice,” he said, addressing the vast SPIEF audience in Greek. “Pursuing strict economic measures will help no one.”
The ECB’s bank rescue mission, while welcome to the banks, was less than the Greek government had hoped for. Greece had reportedly requested €3-billion or more for the banks, but received only about €2-billion. The shortfall was apparently designed to keep the pressure on Greece to agree to a deal by early next week for fear that the banks would collapse without one.
“The game of chicken needs to end and so does the blame game,” European Commission president Donald Tusk said on Friday. “We are close to the point where the Greek government will have to chose between accepting what I believe is a good offer of continuing support, or head toward default.”
The Greek banks have been in slow-motion suicide mode since late January, when Mr. Tsipras’s radical left Syriza government was elected. Syriza went to war with Greece’s international creditors by pledging to end the austerity it claimed was snuffing the life out of the Greek economy. Fearing the standoff would potentially ruin the Greek economy, depositors have been pulling out their bank savings in ever increasing amounts.
Depositors yanked more than €1-billion from Greece’s four main commercial banks on Thursday, raising the week’s total to €3-billion. That was three times the average weekly amount over the past two months, according to the Financial Times.
If Mr. Tsipras went to SPIEF to find a new source of funding, he came up short. In an interview on Russia’s RT television, which was reported by Associated Press, Russian deputy prime minister Arkady Dvorkovich said, “the most important things for us are investment projects and trade with Greece. If financial support is needed, we will consider this question.”
But a spokesman for Mr. Putin played down the notion of any loans to Greece. “To consider such a question, you first have to hear some kind of proposals or initiatives from our Greek partners,” Dmitry Peskov told the media. “To discuss this abstractly, without having any appeals or proposals, would be shortsighted.”
On Friday at SPIEF, Greece and Russia signed a deal to extend a pipeline that would carry Russian gas to Europe through Turkey and Greece. If the pipeline is built – construction is expected to start next year – Greece would receive hundreds of millions of dollars in transit payments.
Mr. Tsipras signalled that Greece is willing to move closer to the Russian orbit if it were to find itself isolated. “Why am I here, not in Brussels? I am here because I believe [Russia] has a big role to play,” Mr. Tsipras said in his speech. “Russia is one of the most important partners for us.”
There is no assurance that Monday’s euro zone meeting will produce a deal that would unlock €7.2-billion in funds left over from Greece’s current bailout program, which was recently extended and is now set to expire at the end of the month, when the IMF payment is due. Mr. Tsipras and his Finance Minister, the combative Yanis Varoufakis, have so far refused to offer new austerity measures in exchange for fresh bailout loans.
The EU, the IMF and the ECB are demanding an increase in the value added tax, a substantial reduction in pension benefits, and other cuts in exchange for the loans. The Greek government believes another round of austerity will kill off any hopes of recovery, making it impossible to pay back its debts.
More than a few economists are sympathetic to Greece’s plight. On the sidelines of SPIEF, Neil MacKinnon, managing director of VTB Capital, said new austerity “will depress the [Greek] economy even further.”
He called the creditors’ insistence that Greece take new loans “a Ponzi scheme gone bonkers. It’s borrowing more money to pay off more borrowed money.”
Mr. Putin did not mention Greece in its speech, which was largely devoted to the state of the Russian economy. Economic sanctions imposed by Europe and North America, combined with the plunge in the price of oil, Russia’s main export, have pushed Russia into recession for the first time since the 2008 financial crisis. Mr. Putin said the worst of the downturn was over. “We have managed to stabilize the situation,” he said.